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Friday, January 31, 2014

It was not because of the power of financial markets or because the Germans didn’t want to “help” the Greeks that Europe suffered through about three years of recurring crises, in which the continued existence of the euro was thrown into question, until August of 2012.

It was because the European authorities were using these acute crises, and did not want to resolve them, until they had extracted certain “reforms” from the weaker European economies (and possibly even some of the stronger ones, if we consider the European Fiscal Compact and what the French government has been doing recently). We know this because as soon as the European Central Bank (ECB) wanted to do so, it put an end to these crises in a matter of weeks, in July-August of 2012, by effectively establishing a ceiling on the interest rates of Italian and Spanish bonds – something it could have done at any time in the prior three years.

We also know this because the political agenda of the troika (the ECB, European Commission, and IMF) is spelled out pretty clearly in the IMF’s comprehensive reports on regular consultations with European governments. A review of 67 IMF reports on the 27 European Union countries during the four years from 2008 through 2011 shows a remarkably consistent pattern: reduce the size of government, reduce the bargaining power of labor, cut spending on pensions and health care, and increase labor supply.Any discussion of the European or eurozone project should have this struggle over economic and social policy at its center....

4 comments:

Mark Weisbrot is clueless. First, the “reforms” extracted from weaker European economies have been paltry: e.g. the Greeks are supposed to be cutting down on the number of bureaucrats, but they’ve largely failed to do so.

Second, if particular EZ countries want to engage in some “non-reformed” practices, like excessive employment protection or too many bureaucrats, why should that bother anyone else as long as the relevant country pays itself wages that are low enough to reflect the above inefficiencies? If the US of A wants to make its export industries ridiculously uncompetitive by implementing very high levels of employment protection in those industries, then it can do so. It would probably have to devalue the dollar to enable it to do that. But that’s no concern of any other country.

Third, when the ECB established a ceiling to periphery interest rates in 2012 that wasn’t because the periphery had (as I mentioned above) implemented reforms to any great extent: it was to stop the EZ falling apart. That is, if interest rates in a periphery country rose to say 30%, the obvious response of that country would be: “Sod the EZ. We’re out of it.”.

"Internal devaluation" reforms are clueless, or as Weisbrot indicates, intentional and criminal acts. While they sound like a solution, would be a kind of solution if they could work, they cannot work and have never worked anywhere, as Lerner pointed out. So in the real world, resistance to them is something to be applauded, not criticized. The problem is excessive Greek acquiescence to these repulsive Procrustean "reforms", not recalcitrance from (self-)mutilation.

Weisbrot doesn’t mention internal devaluation in his article, though he does refer to “neo-liberalism” which is allegedly being imposed on the periphery. But “neo-liberalism” is a very vague all-embracing category of ideas.

As to your point that internal devaluation is a very poor and slow moving solution to periphery lack of competitiveness, you’re quite right. But I don’t see the alternative.

As to your suggestion that internal devaluation may not work at all, that’s possible. It has long been recognised that conventional devaluation (for a country with its own currency) may not work: it all depends on the elasticity of supply and demand for a country’s imports and exports.